US Geithner: European crisis poses risk to global recovery

"Europe is so large and so closely integrated with the US. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand," Geithner told the US Senate Banking Committee.

A growing number of economists expect the crisis will tip the euro zone into recession, putting a further drag on an already weak US recovery and endangering President Barack Obama's chances of being reelected next year.

The United States and the International Monetary Fund have been trying to get European leaders to put in place a strategy to stabilize the situation and Geithner has been pushing the European Union to leverage its 440 billion euro bailout fund.

"The critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop," Geithner said.

At the hearing, which examined how the US government's risk council is fighting threats to the US. financial system, Geithner tried to assuage lawmakers' fears that Europe's debt problems could lead to another Lehman-like crisis. The investment bank's 2008 bankruptcy rippled through the global financial system and triggered a run on money market funds.

"Our firms are in a much stronger position," he said.

"Our institutions hold substantial cushions of capital against the potential risk they may face ahead."

US banks have been shoring up capital levels since the 2008-09 financial crisis.

Geithner said global regulators would do whatever they could to make sure that European banks also complied with the higher capital levels required by the Basel Committee of bank supervisors.

Geithner acknowledged that the Financial Stability Oversight Council has limitations in its ability to predict future risks to the system. The council, which draws together top US financial regulators from various agencies, was established in July 2010 and charged with identifying risks to the financial system.

Chaired by Geithner, the council is made up of the heads of major financial supervisors, including the Securities and Exchange Commission and the Federal Reserve. It is due on Tuesday to issue another proposal on criteria for picking which "systemically important financial firms" will be forced to hold more capital and comply with more rules.